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5 Bank Stocks to Gain From a Slightly More Hawkish Fed

Wall Street finished in the green reversing its five-day negative trend on Thursday following news that United States and China have ramped up their efforts to resolve lingering trade disputes

Although the Fed didn’t favor rising rates in November, there are enough reasons to bet on gradual rate hikes starting next month. The encouraging picture of the U.S. economy in the third quarter, propelled by a strong job market and increased consumer spending has led the Fed to signal a rate hike next month.

Needless to say, a gradual increase in federal funds rate could boost the banking industry. Therefore this might be the best time to bet on a few solid bank stocks.

Fed Keeps Rates Unchanged in November

The Federal Open Market Committee (FOMC) decided to keep interest rates at bay last week, citing moderate growth of business fixed-investment compared with significant growth earlier this year. The ongoing U.S.-China trade conflict could be a major reason behind the decline in business investments.

The Fed has therefore decided to maintain target range for the federal funds rate between 2-2.5%. But the Fed sees a near-perfect economic environment to gradually keep increasing rates in the near term.

Impressive U.S. Economic Growth

Strong consumer spending, which accounts for 70% of the economy, drove the latter in the third quarter to put up its best annual performance in 13 years. The present scenario is indicative of fast-growing spending by American households. The country’s gross domestic product also grew at an annualized rate of 3.5% against Dow Jones economists’ estimation of 3.4% for the same time frame.

Strong job gains and a declining unemployment rate led to substantial contributions as well, with the economy adding 250,000 new jobs in October across major industries, outpacing analysts’ estimation of 190,000. The unemployment rate went down to a 48-year low of 3.7% in October.

American labor force participation inched up to 62.9% in October from September’s 62.7%, pointing to a rise in the number of working-age people seeking jobs. The increased labor force participation can be considered as an indicator of candidates’ confidence in the country’s growing job market.

The Fed also noted that overall inflation and inflation for products excluding food and energy remained near 2% in the past year. The under-control inflation therefore doesn’t pose any risks to the economy, being roughly balanced.

Fourth Rate Hike Likely in December

Per a CNBC report, Fed funds futures market traders are now estimating a 93% probability for a federal funds rate hike in December.

Looking back at the Fed’s September meeting, three rate hikes in 2019 are highly likely. As of now, the rate that the Fed pays on excess bank reserves will be maintained at 2.2%.

Banking Industry to Benefit From Potential Rate Hike

Higher interest rates will boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Therefore, probability of gradual rate hikes from December is bound to increase banks’ earnings, leading the banking industry to perform better.

4 Bank Stocks to Buy Now

We have hand-picked four fundamentally sound bank stocks from the banking industry that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). Each of these stocks have outperformed the broader banking industry.

Meridian Bank carries a Zacks Rank #1 and its expected earnings growth rate for the current year is 105.8% compared with the Banks – Northeast industry’s projected rise of 22.6%. The Zacks Consensus Estimate for the company’s earnings rose 57.7% in the last 60 days.

JPMorgan carries a Zacks Rank #2 and its expected earnings growth rate for the current year is 35% compared with the Banks – Major International industry’s projected rise of 26.6%. The Zacks Consensus Estimate for the company’s earnings rose 1.4% in the past two months.

Commerce BancShares carries a Zacks Rank #2 and its expected earnings growth rate for the current year is 42.6% compared with the Banks – Midwest industry’s projected rise of 28.5%. The Zacks Consensus Estimate for the company’s earnings rose 1.8% in the last 60 days.

Old Second Bancorp, Inc.’s OSBC full service banking businesses include customary consumer and commercial products and services, which banks provide.

Old Second Bancorp carries a Zacks Rank #2 and its expected earnings growth rate for the current year is 44.4% compared with the Banks – Midwest industry’s projected rise of 28.5%. The Zacks Consensus Estimate for the company’s earnings rose 2.6% in the past two months.

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